Houston, TX, Jan. 17, 2013 (GLOBE NEWSWIRE) -- With news that the 112th Congress has avoided the "Fiscal Cliff" by passing the American Taxpayer Relief Act of 2012 (H.R.8), many are wondering how this will impact their business. Some of the changes and the effect those changes will have on businesses are outlined below.
Most of the legislation extended tax credits and other incentives that were set to expire at the end of 2011, like the Work Opportunity Tax Credit (WOTC). Section 309 of H.R.8 extended WOTC to the end of 2013 including a retroactive extension to all of 2012. WOTC is a "Federal tax credit available to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment."[1] This credit has been extended without substantive changes.
Other tax incentives were impacted by the adjustment to the capital gains rate. The Interest-Charge Domestic International Sales Corporation (IC-DISC) tax incentive allows businesses to use the capital gains tax rate for a certain percentage of export income rather than the ordinary income tax rate. Section 102 of H.R.8 raises the capital gains rate from 15% to 20%. Because the maximum ordinary income tax rate is also being increased from 35% to 39.6% (Section 101(b)(3)(A)) the new 20% rate still represents a significant advantage for companies looking to utilize IC-DISC. "Since the maximum ordinary income tax rate went up as well, the IC-DISC has become even more important," commented Karim Solanji, Director at Paradigm Partners.
Other incentives, like the Credit for Increasing Research and Development (R&D credit), had substantive changes. Section 301(a) officially extended the R&D credit (set to expire December 31, 2011) to the end of 2013 and made it retroactively effective for 2012. The R&D credit is calculated by comparing Qualified Research Expenses (QREs) in the current year to QREs from relevant base years. As the base amount increases in relationship to current year QREs, the R&D credit decreases.
When a new acquisition is made, the QREs for that acquisition are included in the year of acquisition and the base years. Formerly, a business could include the new acquisition's QREs in its current-year QREs as of the moment of acquisition but, it also had to include all previous years' QREs in the base amount calculation, creating an artificially high base. Under H.R.8, for the year in which the acquisition is made, the base amount can be adjusted according to the date of acquisition by a proportionate ratio. Paradigm Partners' Executive Vice President of Business Development, Brian Cameron, said, "This change corrected a problem in the former wording of the code and it will definitely benefit taxpayers."
Congress has chosen to extend many benefits for at least another year. Saqib Dhanani, Director at Paradigm Partners, was quoted as saying, "Congress recognizes how beneficial credits and other tax incentives like the WOTC and IC-DISC are." Overall, it was a good day for Congress and a better day for American business owners.